Introduction
Under the Employment Rights Act and the Working Time Directive, all workers and employees are entitled to Holiday Pay and leave.
Since 1st April 2024, there are three types of main holiday pay calculation permitted depending on the type of employment situation and the regular nature of hours worked. The regulation set out the minimum requirements required to be operated by employers. They may choose to provide a more generous holiday entitlement and holiday pay.
These methods are:
- Average Holiday Pay – An annual entitlement of 5.6 paid weeks. Where there are variable additional payments, the holiday pay for Great Britain is to be based on a 52 paid week average earnings. For those under a Northern Ireland contract of employment, the average earnings for holiday is based on the prior 12 weeks average earnings. In both cases, zero pay weeks are excluded from the averaging. This method applied to all workers and employees before 1st April 2024.
- Holiday Hours Accrual. For those with irregular hours working, then holiday entitlement is accrued at a minimum of 12.07% of all hours worked (including additional hours and overtime). When holiday hours leave is taken, then the holiday pay hourly rate is to be the 52 paid weeks earnings divided by the 52 weeks worked hours.
- Rolled Up Holiday Pay (RUHP). For those with irregular hours working, then a top-up payment of RUHP is required each pay period based on a minimum of 12.07% of all earnings in the period including overtime and other payments. When leave is actually taken, no holiday pay is due to be paid. There are protections for those who are sick or on statutory leave.
Holiday pay law in Great Britain changed on 6th April 2020 in relation to the minimum amount of holiday pay for a weeks of leave. In most cases where there is an aspect of variable pay, then the minimum holiday pay entitlement is based on 52 weeks of average pay (any weeks with zero pay are ignored).
Court rulings and changes in the regulations have required the inclusion of overtime and commission in relation to holiday pay, and the accrual of holiday as a percentage of hours worked for regular workers had been ruled as unlawful by the courts and government department responsible for holiday pay policy (DBT). Application of a percentage basis has been introduced from 1st April 2024 as a choice where the employee is irregular or part year worker only.
More details on holiday pay law and guidance from SD Worx can be found at the payroll resource page as Payroll Resources | SD Worx
More specific resource can be found at:
GOV guidance can be found at: https://www.gov.uk/holiday-entitlement-rights
And ACAS guidance at: https://www.acas.org.uk/checking-holiday-entitlement
Entitlement
The SD Worx pay solution does not manage or calculate holiday entitlements, that is an HR employment related activity. It can cover, where configured correctly, the payment of holiday pay.
Average Holiday Pay (AHP)
So there are two main aspects to paying holiday:
- Entitlement (minimum 5.6 weeks leave which equates to 28 days)
- Holiday Pay (subject to a minimum basis of 52 weeks with pay of average earnings)
The legal obligations for holiday entitlement and pay are complex and involve aspects of the agreed terms and conditions and the nature of work.
The obligation falls on the employer as they relate to employment rights – an individual may make a complaint to an Employment Tribunal or the courts where they consider that they have been denied their holiday pay entitlements.
The government are introducing in 2026 a new Fair Work Agency (FWA) who will act as a single enforcer for rights to both National Minimum Wage and Holiday Pay rights.
Why is it so complex
Holiday pay calculation regulations are based on the principle of employee being paid or entitled in weekly amounts. With modern payroll practice, weekly pay is not common, yet the regulations do not cover other pay frequencies well. On that basis employers may need to make some pragmatic decisions on how they apply holiday pay to meet their legal requirements for holiday pay and reduce their risks or being challenged for underpayment.
This SD Worx Payroll capability along with assistance from the PayHR And Legal Services (PALS) team and consultancy, can assist and reduce risks with many aspects of the application of the law and also fitting requirements of the employer compliant scheme.
What is the SD Worx Average Holiday Pay Solution?
The SD Worx pay solution offers facilities which may enable an employer to undertake steps to comply with holiday pay rights. Its basis is on the use of payroll results data, the number of weeks worked within a period, and the earnings which are to be used for holiday pay calculations. An employer would need to be satisfied that the method applied is suitable for their needs and a reasonable basis to undertake holiday pay requirements or find an alternative means of calculation.
The SD Worx Average Holiday Pay Solution provides an automated solution which enables average earnings based on past payroll payment results over an employer set number of periods and the history held for an individual. This may also require the notification of the number of weeks worked within a pay period.
As holiday pay is not based on basic pay or salary – employers need to assess and identify which of their pay elements count for holiday pay average purposes.
Although SD Worx may guide an employer, SD Worx do not provide professional advice on which pay elements should be included so you may consider seeking independent Professional HR / Accountancy / Legal advice if required.
Key considerations are:
- Identifying pay elements that should be included in the average calculation (for example, overtime and commission have been ruled as being required to be included in holiday pay averaging in most cases).
- Identify weeks worked – where a payroll is not weekly, there may be a requirement to notify data representing the value of weeks being paid in the pay period to enable a more accurate calculation
- Payment – setting up of a means of notifying the number of units of holiday entitlement to be paid as related to a week (whether that be periods, weeks, days or even hours)
Care needs to be taken in the setting of the averaging basis as many historic popular employer choice methods do not comply with the regulations or recent rulings.
Employer Holiday Scheme audit
The PayHR And Legal Services (PALS) team or consultancy will undertake an initial assessment to identify whether an employer scheme is compliant with the principle of the holiday pay regulations.
What methods are available within SDWorx-pay?
The SD Worx holiday pay capabilities cover many methods of operation. Some of those that can be supported may not comply with current legal requirement.
There are a number of average holiday pay methods that are available that align with the principles of the holiday pay regulations.
Average Weekly Earnings – daily rate
Suitable for those who work a set number of day each working week.
Average DAILY holiday rate (any holiday pay would be notified as a number of days or fractions of days:
- All pay, or
- Additional pay only (for those who are salaried)
Please note that for Monthly, Lunar, Fortnightly and Weekly payroll frequencies, a definition is required to be applied to define what constitutes the basis of a day unit within that period basis.
Average Weekly Earnings – weekly rate
Suitable for those whose working patterns and pay each week varies. This aid ensuring that the statutory minimum 5.6 paid weeks is appropriately applied.
Average WEEKLY holiday rate (any holiday pay would be notified as being in weeks or fractions of weeks:
- All pay, or
- Additional pay only
Average Hourly Rate
Where an employee works variable hours, this method won’t align with holiday pay regulations.
For irregular paid workers, there are options for Holiday Hours Accrual and Rolled Up Holiday Pay.
Please note that the operation of average hourly rate is not compatible where employees do not have regular contractual hours. i.e. zero or highly variable hours workers. There are also considerations to what should occur when regular hours are increased or reduced.
How many earnings period to use for the average?
Before 6th April 2020, the legal application of averaging required the use of 12 weeks with pay (and zero weeks ignored). Some employers chose to use an alternate basis and different pay frequencies impacted employer choice also (for example, 3 months potentially represents 13 weeks and not 12). This basis continues for Northern Ireland.
Since 6th April 2020, the legal application of averaging within Great Britain (England, Scotland and Wales) requires the user of 52 weeks with pay (with zero pay weeks being ignored).
There are two method of application which are dependent on whether there is a feed of weeks worked:
- Number of periods to be included
- 52 for Weekly 52
- 26 for 2-Weekly / Fortnightly
- 13 for 4 Weekly / Lunar
- 12 for Monthly
- Number of units representing weeks
- If each unit is a week, then this can be set to 52 for all pay frequencies
Where the number of units method is operated, the earnings and weeks worked history is searched until the required number if reached or exceeded, then the average is based on the count of weeks found.
You will need to confirm the correct number of periods to average based on the payroll frequency you are using, the legislation and how you are choosing to operate your holiday pay scheme.
Calculation
Daily or Weekly average amounts
How the calculation works average earnings to derive a Daily or Weekly average: –
- Each pay period, the amount of earnings are stored in a holiday earnings stack to enable future averaging. The solution requires:
- Earnings for holiday to be identified
- The number of units (days or weeks) in the pay period
| Frequency | Default (days) | Suggested values (days) | Suggested Number of weeks in period |
| Monthly | 21 | 21.6667 (260 working days) | 4.3452 |
| Lunar (4 weekly) | 20 | 20 | 4 |
| Fortnightly (2 weekly) | 10 | 10 | 2 |
| Weekly | 5 | 5 | 1 |
This enables a daily or weekly average. This is not related to when worked but to the entitlement basis on when paid.
- Each pay period, the earnings stacks are used to derive average periods earnings which are then divided by the number of units and populating the solution with rate RHAV (Rate Holiday AVerage – RHAV):
- If selected, excludes part worked pay periods
- Number of periods required, or if not available the number that are available
- If selected, excludes zero pay periods
- This can then be paid using worked hour (W data items) expressing as days.
- A holiday pay instruction worked hours (W data items) payment can be notified to pay the relevant number of units (such as weeks, days or hours).
Hourly average amounts
How the calculation works calculating an average hourly rate:-
- Each pay period, the amount of earnings and the hours applicable, are stored in a holiday earnings and hours stack to enable future averaging. The solution requires:
- Earnings for holiday to be identified
- Hours for holiday to be identified
- Each pay period, the earnings and hours stacks are used to derive an average earnings rate known in the solution as the RHAV (Rate Holiday AVerage – RHAV) by using:
- Number of periods required, or if not available the number that are available
- If selected, excludes zero pay periods
- If selected, excludes part worked pay periods
- The RHAV can also be associated with an equivalent minimum value rate so that it can never go below an agreed amount. That can be an employee or company rate. This can also prevent a negative rate in exceptional circumstances.
- If only additional amounts are being averaged, the RHAV can also include a fixed pay amount (stored as either an employee or company rate).
- A holiday pay instruction can be notified to pay the relevant number of hours against the RHAV rate.
History
When joining the SDWorx-pay solution or when commencing the operation of holiday pay averaging, the calculation is dependent on prior history being available for the calculation – Of course, this will not be there – so there are options to upload any past history of Amounts (and if required the weeks worked) to be applied for up to 52 paid pay periods of earnings and associated worked weeks history. Else the history of earnings (and weeks worked if required) will commence and build up from the point for starting to utilise the facility.
If SD Worx consultancy assistance is required to obtain and load historic of values, then their is an assistance fee.
What about the control of entitlements?
The average holiday pay facility is about payment and the employer notifying to payroll what units (whether that is days, weeks, or even hours – or the fraction of the unit’s basis) are to be paid.
It does not control the individual qualification or policing of entitlements. That may be an activity that can be controlled in you time and attendance or HR solution.
Equally SDWorx-Pay does not limit the use of rates to say the first 4 weeks of holiday. That is required to be controlled by the holiday booking system with the data being passed through to use the correct payment rates basis.
Irregular Hours Workers – Rolled Up Holiday Pay (RUHP)
Since April 2024, an employer has the choice to move those who are irregular or part year workers to a new Rolled Up Holiday Pay method.
This is also supported by SDWorx-Pay.
- Relevant payments are applied to an Earnings Accumulator
- A Rolled Up Holiday Pay (RUHP) pay elements is applied to employees who qualify for RUHP with the relevant RUHP percentage to be applied (minimum 12.07%).
- Each pay period a top-up payment of RUHP is applied and paid (note this payment does not count as National Minimum Wage Pay).
The is also a requirement to make payments of RUHP during periods of sickness and statutory leave. Any payment during these periods would need to be provided to SDWorx-Pay to ensure that RUHP is applied.
SDWorx-Pay – flexibility
The SD Worx solution can be adapted to meet most employer stated requirements when using pay history. If there is a more extensive needs than the standard average holiday pay method using payroll result values, then that would require more specialist assistance and specific project assessment.
Additional Services
Some employers have complex requirements above standard implementation that may need additional help from our specialist teams to aid integration with their other time and HR solutions (charged at a holiday pay assistance rate) below is not exhaustive:
- Interfacing options with time and attendance or HR systems
- Assistance with the determination of historic period history or earnings and units
- Additional activity to implement and operate the solution and this may attract additional charges
- Undertaken employer specific calculations or applying multiple different schemes
Any customer unique or bespoke activity may require quotes and prioritisation within product development and enhancement routes.
Implementation Methodology and Effort profile
SD Worx pay solution cater the 52 paid periods average holiday pay calculations. Coverage of the use, expertise, and enhancement is reflected in the measure of days effort. Days is not necessarily an indication of time resource to a specific implementation.
The day pricing is expanded to cover:
- Expertise and guidance
- Software product development and maintenance of the capabilities
- Support
Future changes to configuration for changes in the future due to either employer of legislation changes would be subject to change control. The holiday scheme is the employer’s obligation and ‘not a statutory payment’ (DBT). The regulations act as a minimum, employers may apply more generous rules.
Customer action to determine whether the SD Worx Solution can be used
Action 1 – Audit the employer holiday pay scheme – ensure that it meets the requirements of the holiday pay regulations
Action 2 – Identify the holiday pay average method required and how that relates to your holiday entitlement basis
Action 3 – On a salaried payroll, the likely list of pay elements to be averaged will not include salary. It will only include the extras you want to be averaged. Please identify by highlighting the pay elements you require being included in the holiday pay average.
Action 4 – Please advise if you have mixed salary, hourly paid, variable paid (such as zero hours contractors or part time irregular working) on the payroll?
Action 5 – Advise if you want us to undertake any additional services (subject to additional fees)
Typical project steps (as an example)
Your average holiday pay project will include applicable elements of:
- Discovery – what are your scheme rules and requirements? Do these comply with the current regulatory requirements? Can these be achieved in the SD Worx pay solution?
- Pay and accumulation configuration – this identifies which earnings are to be part of the calculations and how units are to be identified whether those be days, weeks, or even hours
- Average Holiday Pay Calculation Configuration – what holiday rules are to be applied. What basis of RHAV is to be operated whether that be in terms of Days, Weeks or Hours (this must match the entitlement basis. Is there a minimum to be considered or is the RHAV in addition to other standard payments?
- Any Extract configuration for external use
- Any Import configuration for external data feeds
- Extraction of earnings and units’ stacks (if applicable)
- Import of earnings and units (if applicable)
- Validation of AHP Configuration
- Calculation verification
- Project completion
Last updated 16/01/2025 (PSP)